Income Taxes

12 Months Ended

Dec. 31, 2017

NOTE 8 - Income Taxes

On December 22, 2017, comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (Tax Act) was enacted by the U.S. government. The Tax Act is generally effective January 1, 2018, and among other changes, reduced the federal corporate income tax rate from 35% to 21%, eliminated the corporate Alternative Minimum Tax, modified numerous insurance-specific provisions, and further limited deductions for executive compensation. The effects of the Tax Act are reflected in the Company's deferred tax calculations as of December 31, 2017.

ASC 740 Income Taxes requires that the impact of the Tax Act be recognized in the period in which the law was enacted. As a result, total income tax expense for 2017 included a benefit of $99.0 million to reflect the change in tax rates included in the Tax Act as of the date of enactment, as a result of re-measuring the Company's net deferred tax liability.

The Company has recorded provisional amounts for the taxes associated with its partnership investments and the changes in discounting unpaid loss reserves based on information available at December 31, 2017. The Company has reasonably estimated the tax impact of its partnership investments; however, accumulated foreign earnings in the Company's partnership investments could be impacted by the Tax Act. As part of its normal U.S. income tax return preparation process, the Company expects taxes to be adjusted as final earnings from partnership investments are received. Provisional tax computations related to the Tax Act’s loss reserve discounting changes have also been reasonably estimated, and may be adjusted once the U.S. Treasury issues additional guidance. With respect to loss reserves, the Tax Act changed the prescribed interest rates, extended the time periods for discounting certain long-tail line coverages, and eliminated the Company’s ability to use its own payment patterns. The Tax Act’s changes to computing loss reserves are generally effective January 1, 2018, and any additional income taxes determined to be owed as a result of applying these new provisions versus the previously calculated amounts are includible in taxable income pro-rata over the next eight years, beginning in 2018. Any adjustments to provisional amounts will impact the Company's consolidated results of operations and must be reflected no later than in the Company's December 31, 2018 Consolidated Financial Statements.

The income tax assets and liabilities included in Other assets and Other liabilities, respectively, in the Consolidated Balance Sheets were as follows:



($ in thousands)	December 31,
	2017			2016
Income tax (asset) liability
Current	$	(16,266	)	$	(3,832	)
Deferred	157,775			205,699

Deferred tax assets and liabilities are recognized for all future tax consequences attributable to "temporary differences" between the financial statement carrying value of existing assets and liabilities and their respective tax bases. There are no deferred tax liabilities that have not been recognized. The "temporary differences" that gave rise to the deferred tax balances were as follows:



($ in thousands)	December 31,
	2017		2016
Deferred tax assets
Unearned premium reserve reduction	$	11,472	$	18,253
Compensation accruals	8,359		15,893
Impaired securities	2,240		8,214
Other comprehensive income - net funded status of pension and other postretirement benefit obligations	3,526		6,387
Discounting of unpaid claims and claim expense tax reserves	3,889		2,463
Postretirement benefits other than pensions	321		578
Total gross deferred tax assets	29,807		51,788
Deferred tax liabilities
Other comprehensive income - net unrealized gains on fixed maturity and equity securities	95,583		112,311
Deferred policy acquisition costs	52,438		91,028
Life insurance future policy benefit reserve	102		33,145
Life insurance future policy benefit reserve (transitional rule)	23,869		—
Discounting of unpaid claims and claim expense tax reserves (transitional rule)	2,513		—
Investment related adjustments	8,127		15,762
Intangible assets	2,557		4,262
Other, net	2,393		979
Total gross deferred tax liabilities	187,582		257,487
Net deferred tax liability	$	157,775	$	205,699

The Company evaluated sources and character of income, including historical earnings, loss carryback potential, taxable income from future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences, and taxable income from prudent and feasible tax planning strategies. Although realization of deferred tax assets is not assured, the Company believes it is more likely than not that gross deferred tax assets will be fully realized and that a valuation allowance with respect to the realization of the total gross deferred tax assets was not necessary as of December 31, 2017 and 2016.

At December 31, 2017, the Company had available the following carryforwards or credits.



($ in thousands)	Pretax
	Amount		Expiration Years

Operating loss carryforwards	$	705	2037
Charitable contributions carryforwards	296		2021-2022

The components of the provision for income tax expense were as follows:



($ in thousands)	Years Ended December 31,
	2017			2016		2015

Current	$	3,813		$	26,359	$	29,885
Deferred	(84,585		)	4,108		6,085
Total income tax expense	$	(80,772	)	$	30,467	$	35,970

Income tax expense for the following periods differed from the expected tax computed by applying the federal corporate tax rate of 35% to income before income taxes as follows:



($ in thousands)	Years Ended December 31,
	2017			2016			2015

Expected federal tax on income	$	31,041		$	39,981		$	45,308
Add (deduct) tax effects of:
Tax-exempt interest	(5,335		)	(5,789		)	(6,678		)
Dividend received deduction	(4,448		)	(3,985		)	(3,564		)
Tax Act DTL re-measurement	(98,988		)	—			—
Employee share-based compensation	(3,258		)	127			265
Other, net	216			133			639
Income tax expense (benefit) provided on income	$	(80,772	)	$	30,467		$	35,970

The Company's federal income tax returns for years prior to 2014 are no longer subject to examination by the Internal Revenue Service (IRS).

The Company recognizes tax benefits from tax return positions only if it is more likely than not the position will be sustainable, upon examination, on its technical merits and any relevant administrative practices or precedents. As a result, the Company applies a more likely than not recognition threshold for all tax uncertainties.

The Company records liabilities for uncertain tax filing positions where it is more likely than not that the position will not be sustainable upon audit by taxing authorities. These liabilities are reevaluated routinely and are adjusted appropriately based upon changes in facts or law. The Company has no unrecorded liabilities from uncertain tax filing positions.

HMEC and its subsidiaries file a consolidated federal income tax return. The federal income tax sharing agreements between HMEC and its subsidiaries, as approved by the Board, provide that tax on income is charged to each subsidiary as if it were filing a separate tax return with the limitation that each subsidiary will receive the benefit of any losses or tax credits to the extent utilized in the consolidated tax return. Intercompany balances are settled quarterly with a final settlement after filing the consolidated federal income tax return with the IRS.

A reconciliation of the beginning and ending amounts of unrecognized tax benefits, excluding interest and penalties, is as follows:



($ in thousands)	Years Ended December 31,
	2017			2016			2015

Balance as of the beginning of the year	$	1,594		$	1,039		$	656
Increases related to prior year tax positions	101			348			—
Decreases related to prior year tax positions	—			—			(15		)
Increases related to current year tax positions	422			283			398
Settlements	—			—			—
Lapse of statute	(327		)	(76		)	—
Balance as of the end of the year	$	1,790		$	1,594		$	1,039

The Company's effective tax rate would be affected to the extent there were unrecognized tax benefits that could be recognized. There are no positions for which it is reasonably possible that the total amount of unrecognized tax benefit will significantly change within the next 12 months.

The Company classifies all tax related interest and penalties as income tax expense.

Interest and penalties were both immaterial in each of the years ended December 31, 2017, 2016 and 2015.